Buy to let mortgages

What is a buy to let mortgage?

A buy to let mortgage is a loan for purchasing or refinancing residential property which is let to tenants rather than lived in by the borrower. Classed as a business transaction, rates and fees are typically higher than those you would find with a standard residential mortgage. You'll need a larger deposit too - the maximum you can borrow is 85% loan to value although there are many more rates available at 75% LTV.

What risks are involved?

Property investment can be a very effective way of generating income if managed correctly, however it doesn’t come without its risks.

Property investors typically rely on their rental income to repay their mortgage, so if a landlord is unable to secure a tenant and the property is left unoccupied there is a chance they won’t be able to keep up with their mortgage repayments, meaning the property could be repossessed.

A void period is not the only risk that needs to be considered by those looking to go into property investment; major repairs could increase overall costs and of course the housing market on its own can have a huge impact on an investors’ potential profit margin.

What is the borrowing criteria?

Unlike residential mortgages which are calculated on the basis of the applicant’s salary, buy to let mortgages operate differently. The mortgage lender applies a rent to interest (RTI) cover calculation, meaning the borrower must be able to prove they can obtain enough rental income from the tenant to cover the interest on the mortgage. RTI cover amounts vary between lenders, however the rental income usually has to be between 125% and 130% of the monthly mortgage repayment. A large proportion of lenders also require a minimum income of £25k per annum in addition to the income made from rent.

Like any other mortgage, the borrower must put up a deposit for the property. Currently buy to let mortgages are available up to 85% loan to value (LTV), meaning the borrower would have to put up a deposit of 15%. However, 75% LTV is a more realistically achievable figure.

As far as age restrictions are concerned most buy to let mortgage lenders impose a maximum age of 75 on maturity of the loan, however there are a small selection of specialist lenders that extend this to 85 years. 

Interest only or repayment?

The decision of whether an investor chooses an interest only or repayment (capital and interest) buy to let mortgage will very much depend on the individual's investment strategy. The repayment route is often suited to investors using property as an alternative pension plan or looking to build a small property portfolio. With monthly capital and interest repayments, the investor can be sure that at the end of the mortgage term the full loan is repaid.

The interest only route is usually more popular with professional landlords and property investors for two main reasons. Firstly, with an interest only strategy the investor's aim is usually to continue building a sizeable portfolio of property. By choosing this strategy the investor has the cashflow to re-gear their property capital in order to increase their number of properties. This is usually a long term strategy. At the end of the mortgage term, the property is usually sold to repay the initial advance. Secondly, there are certain tax advantages as interest due on buy to let mortgages can be off-set against tax. We recommend that you seek professional advice from a qualified accountant regarding the tax incentives available.

Are buy to let mortgages regulated?

No, unlike domestic residential mortgages, buy to let mortgages are not regulated by the FCA (Financial Conduct Authority), however recent regulations proposed by the Government could affect part of the buy to let market from March 2016. The new regulations propose that buy to let mortgages for borrowers classed as “accidental landlords” will be regulated in the same way as residential mortgages.

Read the full story - Government proposes new buy to let regulations

Some buy to let mortgages are not available on the high street and can only be accessed via intermediaries such as Mortgages for Business. Mortgages for Business is a member of the National Association of Commercial Finance Brokers, a self-regulating body that has a strict code of conduct. If you are unsatisfied with our service, you can contact them to make a formal complaint.

Why use a mortgage broker?

The majority of buy to let mortgages can only be accessed via intermediaries, so you will be limiting your options if you choose to go direct.

When selecting a mortgage broker it is essential to check that they are independent, otherwise you may receive biased advice. As a mortgage broker with access to the whole of market, we are independent of lenders and therefore impartial, so we will be able to use our expertise to recommend the correct mortgage for your financial situation.

At Mortgages for Business we are in the privileged position of being able to access exclusive and semi-exclusive buy to let products that are only available via a limited number of intermediaries including ourselves. In addition, our business volumes often enable us to offer our clients preferential processing treatment by lenders.